I'd suggest contacting the IRS directly for an authoritative opinion, if searching their website doesn't answer the question. I've found them to be pretty decent at answer straightforward questions like this one.
– keshlamJul 31 '14 at 19:25

3 Answers
3

Disclaimer: I am not an attorney, and I have not 100% researched the law. Take any advise from an online forum with a grain of salt. Please consult an attorney, tax specialist, or the IRS directly for any concrete answers.

AFAIK there isn't anything that would prevent you from starting a business. Simply owing back taxes shouldn't make a difference on how you make money, whether that is working for yourself or someone else. All the IRS is concerned about at this point is that you still owe them.

When going through the process of forming an LLC a couple of years back, I don't recall any personal tax information being brought up except when we were discussing possible loan options.

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.

A lien will exist on your credit report for 7 years after it is released:

The IRS releases your lien within 30 days after you have paid your tax debt.

With a lien, it will be very difficult to get a loan or other financing for your small business. If this ends up being the case, you can try to get a discharge or subordination on specific property that would allow lenders a claim on your property ahead of the IRS. Otherwise, you may find yourself relying solely on what money you currently have.

The Fresh Start Initiative increased the IRS Notice of Federal Tax Lien filing threshold from $5,000 to $10,000; however, Notices of Federal Tax Liens may still be filed on amounts less than $10,000 when circumstances warrant.

Since you currently owe ~$8,000 over the past 3 years, it is possible that adding another year in back taxes will cause the IRS to file a lien if they have not yet already done so. So it may be something to keep an eye on if you do plan on taking out a loan for your business.

It is the presupposition that makes this a rather ridiculous question. Makes me curious, would this be a civil or criminal crime?

If you are convinced that this presupposition of illegality is a thing, talk to a lawyer. Yes, there may be consequences of doing any variety of actions while you owe the IRS, and while you do not owe the IRS.

As an unincorporated business the IRS does not stop you from gaining an additional source of income to pay them with.

Perhaps lenders might not help you with capital.

As an incorporated business no state is going to ask you if you "owe back taxes" before they allow you to pay them to register your business in their state.

This isn't legal advice, I'm just assuming there is no legal advice to give based on your presupposition, to your original question, I'm going to go with no.

I heard it was illegal to begin a new business while still owing the
IRS.

No such thing.

"Renovating business" may require certain State licenses that may in turn require you to show that you've not violated any laws (including tax laws), so you may want to check that. But as a general rule - you can "start" a business any time you want.